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The Alarming Multilateral Agreement on Investment (MAI) Now Being Negotiated at the OECD

Public Citizen’s Global Trade Watch Backgrounder

In the past three decades, the nature and scale of international trade and investment have undergone staggering transformations. Global capital flows — investment in productive capacity, portfolio investment and currency trading– have grown exponentially. However, the U.S. public, press or policy-makers have paid little attention to the tremendous implications of “liberalized” investment flows.

The enormous transformation, now being described as globalization, is promoted by its proponents as providing unrivaled economic opportunities. Its critics argue that the current globalization process actually threatens economic and social stability and the environment. However, all agree that globalization presents profound new issues for governments seeking to promote balanced economic growth and enhance social well-being.

A new treaty is being negotiated which would accelerate economic globalization while at the same time greatly restricting the power of democracies to control investment policy. The proposed Multilateral Agreement on Investment (MAI) would greatly hinder the ability of governments to combat the worst consequences of economic globalization: increased disparity of wealth and income, growth of national and global monopolies and loss of democratic control of a wide range of policies, from human rights to the environment, from labor rights to welfare policy.

The proposed MAI would legally limit how and when nations, states or communities can set investment policy. The MAI would require “national treatment” for all member countries meaning foreign investors must be treated equal to domestic investors in all instances. Also, the MAI would ban “performance requirements,” such as employment, reinvestment or other conditions used to regulate multinationals investing in some communities.

As if eliminating the government’s limited tools to regulate the global economy weren’t enough, the extreme MAI proposal would actually empower investors and corporations with new legal instruments to strong-arm governments. Namely, the MAI would grant legal standing to investors and corporations so that they can directly sue governments in international tribunals for failure to deliver all of the MAI’s benefits.

The ascendancy of economic globalization has been accompanied by real economic disparity:

  • In the last 30 years, the richest 20% of the world’s population have increased their share of world income from 70% to 85%; The share captured by the poorest 20% has declined from 2.3% to 1.4%.
  • U.S. income disparity is the worst among all developed countries. Since 1967 the income captured by the wealthiest 5% of families rose from 16.4% to 20.1% versus the income captured by the poorest 5% of families which dropped from 5.4% to 4.2%. Nearly 22% of the U.S. population under age 18 live below the official poverty line.
  • The real median earnings of full-time U.S. workers declined again in 1995 (0.7% for men; 1.5% for women), as they have in each year of the economic recovery that began in 1992. Such sustained recovery without wage growth is unprecedented in nearly 100 years of data-keeping. While the Clinton Administration touts job creation, the four occupations with the greatest numerical increases over the next decade according to the Labor Department are, in order: cashiers, janitors, retail clerks, and waiters.

Today any nation wanting to respond to public demands to address widespread economic and social problems must do so in the context of massive international investment flows and increasingly uprooted capital and corporations. Investment issues have achieved significantly less public, press and policy attention than trade flows.

However, many multinational corporations, including major financial interests, have focused on investment issues. They have quietly, but aggressively, pursued global investment rules to suit their narrow interests. Indeed, despite a total lack of public awareness, negotiations to establish comprehensive global investment rules through the MAI were targeted for May 1997 completion at the Organization for Economic Cooperation and Development (OECD). The OECD is a Paris-based invitation only secretariat that includes 29 member countries, including all of the world’s wealthiest nations. As of April 1997, the deadline for completion of the enormous, yet publicly unknown, treaty was pushed back at least six months.

I. The Proposed OECD Multilateral Investment Pact

Since 1995, the OECD has conducted formal negotiations of a Multilateral Agreement on Investment. It had been virtually impossible to obtain information about the MAI negotiations until a February 1997 negotiating text was leaked. This nearly-completed 147 page text has finally allowed analysis of the proposals. The stated purpose of the pact is to remove most remaining barriers to, and controls on, the mobility of capital. These OECD talks reflect the ascendance of foreign investment in the global economy. They also reflect the desire of proponents of economic globalization to expand to the realm of investment the global deregulation that has been imposed on trade in goods and services via agreements such as the 1994 General Agreement on Tariffs and Trade (GATT) Uruguay Round.

Thus, the MAI could reduce the capacity of national and sub-national governments to limit the degree and nature of foreign investment (both outgoing and incoming), to impose standards of behavior on investors and to shape investment policy that promotes social, economic and environmental goals.

A broad range of existing laws (in the U.S. and abroad) designed to influence and regulate the actions of all investors could be subject to challenge under proposed MAI terms. In the U.S. the MAI could limit:

  • some stock market safeguards;
  • community reinvestment laws;
  • local tax policies aimed at multinational corporations;
  • expropriation of property for environmental safe guards;
  • restrictions on foreign ownership of real estate and even strategic industries;
  • domestic content requirements; and
  • direct controls on the movement of capital.

The MAI’s proposed limits could also undermine the ability of policy-makers to address inequality between developed and developing nations and between social groups within nations. Many U.S. laws granting favorable treatment to small and minority businesses and directing investments to impoverished regions would run afoul of the proposed terms of the MAI.

In developing countries, where the need for foreign capital is often desperate, some proposed MAI provisions could leave governments less able to negotiate terms with investors that address local economic and social needs.

As well, the trend toward volatility and instability in global financial markets would be enhanced as the MAI would limit national currency trading, portfolio and stock market investment. This trend threatens the security not just of individual currency or stock markets, but of entire national economies. With the MAI encouraging greater capital mobility, competition for investment among nations and sub-territories could become even more cutthroat. One result would be growing pressure on nations to voluntarily “liberalize” their economies by competing to be the quickest to eliminate environmental, social and labor standards.

Most importantly, critics argue, potential action at the national and international levels to restore the power of mediating institutions over the movements and actions of capital – in order to halt the race-to-the-bottom and promote economic and environmental stability and security – could be greatly reduced by proposed MAI provisions.

II. The MAI Would Establish New Rights for Corporations and Investors to Sue Nations for Failure to Meet the MAI’s Terms

A dramatic proposal in the MAI draft would confer on private investors the same rights and legal standing as national governments to enforce the MAI’s terms. Under this provision, private investors could bring cases against governments through powerful international dispute resolution claiming they have not obtained due benefits promised under the treaty. This dispute resolution system is proposed to be binding on governments with enforcement through monetary fines. This provision would newly expose governments to legal and financial liabilities from which they are now shielded through the concept of sovereign immunity in domestic legal systems.

To underscore the significance of this MAI proposal, consider that such private legal rights against governments for international enforcement proceeding do not exist in the powerful and far-reaching World Trade Organization established by the GATT Uruguay Round. The WTO secretariat, fifty years of GATT history and a vast majority of WTO members steadfastly adhere to the principle that only national governments should have rights in international agreements.

This new set of rights and powers would provide substance to the concern voiced by many community, labor and other activists that corporations are effectively replacing governments in making key policy decisions and operating basic functions previously served by governments, such as security, education and transportation. Indeed, limitation on direct corporate involvement in international commercial dispute resolution is one reason the United States has opposed bringing the MAI’s proposed investment rules into the WTO, and instead favors a free-standing OECD-based treaty where corporate/investor standing could be granted.

Currently, the only place in international commercial law that standing for private interests exists is in one narrow provision of the North American Free Trade Agreement (NAFTA). Already the U.S.-based Ethyl Corporation has used that very limited provision of the NAFTA Investment Chapter to attack the Canadian government on one of its environmental laws. The private investor/corporate standing proposed for the MAI would pertain to all of the MAI’s terms.

The current draft of the MAI does not include an attendant set of obligations or accountability for investor conduct or for the prohibition of anti-competitive business practices. The current text lacks binding provisions, or even any meaningful language, on corporate responsibilities vis-a-vis labor practices, local community investment or other obligations, or ethics. Indeed, with the exception of vague language on environmental questions recently added in an attempt to quiet environmentalists now beginning to learn about the MAI, the MAI proposal fails entirely to include public interest considerations. Unfortunately, given the closed negotiating process, this is not entirely surprising.

III. The MAI proposal would strictly apply the principle of “National Treatment,” which prohibits governments from treating foreign investors differently from domestic investors.

The MAI could have far reaching implications on U.S. federal, state and local law and policy. The MAI National Treatment proposal could prohibit laws that can be shown to have a discriminatory impact on foreign capital, even if they have no discriminatory intent. Facially-neutral laws placing limits on the expansion of extractive industries such as mining or forestry for instance, would be vulnerable on the grounds that they discriminate against foreign investors trying to gain new access to resources relative to domestic investors who already have access.

The MAI focuses on discriminatory impact, not a policy’s intentions.

The MAI’s terms could provide the U.S. tobacco giants a new way to get rid of Thailand’s public health laws, and similar laws in other countries. In response to a public health law in Thailand aimed at limiting smoking, in the early 1980’s the United States Trade Representative challenged the Thai government at the WTO. A GATT panel struck down the Thai ban of all cigarette imports, but let stand the 100% ban on advertising and public vending machines. The GATT panel admitted that such advertising bans would have a stronger impact on new foreign brands trying to establish a market share against long-available local cigarette brands. However, the GATT panel ruled that it would allow this disparate impact because the narrow public health exception in GATT provided some limited flexibility for a law whose intention was not discrimination, even if that was its effect. The MAI’s private standing rules could allow the tobacco corporations themselves to file and prosecute a complaint against such a facially-neutral health rule using the MAI’s dispute resolution system and the MAI’s notion of national treatment that focusses on secondary impacts. As drafted, the MAI could effectively forbid:

  • Local, state, and federal programs that set aside a certain portion of government-guaranteed loans or other benefits to promote small or minority business. Any preferential treatment aimed specifically at fostering development of certain categories of investors or investments – in this case minorities and women investors and small business investments – could very well have an unequal impact on foreign investors even if that was not their intent. Similar programs in the European Union specifically promoting business development in economically stressed regions of Europe also could be forbidden. Ironically, the MAI could become a powerful tool for domestic corporate interests who have long opposed these policies. Such domestic interests would merely need to recruit (or create) one foreign investor to use the MAI’s dispute resolution system to challenge U.S. minority and small business assistance programs.
  • Policies promoting small businesses also could be vulnerable under the MAI. A foreign investor might successfully challenge an advantage gained by a domestic small business from special treatment. Such challenges using the MAI could have “boomerang” effects in the United States. Any compensatory action taken as a result of an MAI challenge could create a political and legal opening for large businesses in the United States to argue that their international competitors are obtaining preferential treatment.This could result in either the small business losing its regulatory relief or a large company being afforded the same benefit.
  • U.S. laws that limit foreign ownership and use of land to protect natural resources and environmental quality. For example, Arizona state law restricts the sale of public lands to state residents or businesses and many western states have reclamation standards for surface-mined land that exceed minimum federal standards. Such laws could be challenged as discriminatory to foreign investors.
  • U.S. laws that restrict foreign ownership in certain strategic industries and that do not fall into the MAI’s narrow national security exception, such as broadcasting.
  • Development strategies used in the Third World to reap local benefits from foreign investment including: 1) National laws that seek to limit foreign ownership of local resources and industries, including agricultural land, mineral resources, and newly developing sectors of the economy, could be challenged under the MAI. Thus, the rules limiting foreign ownership of rural land that are the cornerstone of many developing countries’ land redistribution policies could be suspect under these MAI terms. 2) Economic development policies in the developing world that earmark subsidies and other forms of public assistance to local companies. For instance, under the proposed MAI terms, if Sri Lanka wants to provide low-interest loans to local toy manufacturing start-ups, it would have to make the same loans available to U.S.-based multinational toy giants Mattel and Hasbro.

IV. The MAI proposal would apply the principle of “Most Favored Nation” (MFN), to investment rules, requiring equal treatment among all foreign investor and target countries.

Requiring most favored nation treatment in all investment rules could prevent governments from distinguishing between foreign investors or foreign investment targets based on countries’ human rights, labor or other records:

  • The rule could require revocation of existing bans or restrictions on U.S. investments in certain countries, including Libya, Iran and Iraq unless these restrictions can be defended under the narrow exception for national security that the MAI negotiators have included in the draft agreement. A recently-passed Massachusetts law that bars state agencies from buying from corporations that have investments in Burma based on Burma’s extreme violations of human rights and political oppression. The success of sanctions against South Africa under apartheid is the clearest illustration of the efficacy and importance of using investment restrictions to address human rights issues. The unilateral sanctions implemented by the U.S. against South Africa concerning U.S. investment would have been prohibited under proposed MAI terms had both nations been signatories.
  • The MAI proposal could also deny governments future use of powerful tools for encouraging compliance with labor and environmental standards. For instance, in the U.S. the “Jackson-Vanik Amendment” mandates annual review of countries’ trade status based on open migration policy. This is the law that is credited with obtaining the freedom of nearly one million Jews from the Soviet Union in the 1970’s and 1980’s.
  • Distinctions between countries could also be forbidden in applying investment-related government programs. Thus, government-backed investment insurance provided through the Overseas Private Investment Corporation (OPIC) or assistance through the Small Business Export Administration could no longer be conditioned on even the weak environmental and labor reviews now in place. It was an environmental review under OPIC that resulted in the denial to Caterpillar of federal investment insurance for exports of heavy equipment for sale to the Chinese government. The equipment was to be used on the environmentally-devastating Three Gorges Dam project which is also under attack for its human rights implications, including forced relocations of one million people.

V. The MAI draft includes a broad ban on “performance requirements” that could prohibit a wide range of measures countries use to promote responsible corporate behavior.

The MAI proposal forbids performance requirements that condition the provision of subsidies and other government benefits on corporate behavior. The proposed MAI could put at risk:

  • community reinvestment requirements,
  • living wage laws,
  • specific job-creation requirements for government-subsidized firms,
  • preferential treatment for environmentally and socially responsible companies and progressive new policies now being developed.

Among the policies that could be vulnerable are federal and local community reinvestment rules designed to promote investment by banks in impoverished areas. The federal Community Reinvestment Act (CRA) works by conditioning regulatory approval for the opening of new bank branches on a bank’s record with regard to making loans and other investments in under served locales. Thus, unless a bank can demonstrate it is giving loans and otherwise investing in the community in which it is located, it may not obtain permission to expand. Local community reinvestment laws also condition deposit of public funds or use of banks by public agencies on a bank’s record, often applying more stringent standards than those used by federal regulators. If the MAI drafters make no exception for bank regulations, these laws could be challenged as forbidden performance requirements.

Living wage laws and local incentive contracts are examples of policies the MAI could undermine that are most creative new programs being developed at the local and state level to enhance standards of living. Several cities have passed (and many others are considering) living wage statutes that require payment of a family-supporting wage and some benefits rather than just the federal minimum wage for contractors doing business with the city and investors seeking preferential tax and other treatment. Local incentive contract programs condition provisions of the tax, property or other benefits used to lure investors on the fulfillment by investors of certain commitments. Typical of the conditionalities used in such programs are: paying a set wage that is higher than the federal minimum and creating a certain number of jobs and maintaining them for a set period to obtain tax and property benefits, or providing equipment or staff for local schools or other public services.

Many environmental laws and standards can be challenged under the MAI as conditions to investment, or performance requirements. Many U.S. states have unique laws that are designed to protect natural resources. For example, several states mandate that glass or plastic containers are made from a minimum percentage of recycled content and some practice preferential purchasing of materials made with recycled content. Not only do laws that restrict land ownership and use seemingly violate National Treatment, they risk violation of the ban on performance requirements. Oregon and Idaho state laws prohibit unprocessed timber sales to foreign companies.

The MAI ban on performance requirements could especially threaten national laws in Third World developing countries that are designed to strengthen domestic economic growth. For example, laws requiring foreign investors to form partnerships with local firms so as to foster local capital accumulation; and laws that promote the development of local intellectual capital by requiring the employment of local managers.

The MAI proposal could also prevent restrictions on the repatriation of capital by foreign investors to the “home” country. The draft MAI proposal contains rules that would limit countries from trying to stabilize currency trading and investment in national stock markets. The agreement would also remove countries’ authority to regulate capital flow could effectively prevent countries from imposing conditions on portfolio investment such as “speed bumps” (requirements that investors hold onto financial instruments for certain length of time) which some countries use to avert disasters like the Mexican peso crisis. Such MAI rules could impede efforts to enhance the stability of, and reduce the role of speculation in, the global financial system where currently over $1.3 trillion in non-productive trade occur daily (such as currency).

VI. What is at stake with the MAI proposal?

The draft MAI proposal would require sub-national jurisdiction (states and provinces), as well as national governments, to comply with the terms of the agreement and make sub-national governments subject to the same enforcement strictures.

  • The current MAI plan would make the U.S. state and local governments and their equivalents elsewhere automatically bound by the MAI once their national governments’ accede to the pact. Under the MAI’s proposed enforcement provisions, national governments would be required to compel compliance from state and local jurisdictions. This provision is particularly disturbing because states and localities are often the breeding and proving grounds for new policy approaches that then become the basis for creative national action.

The proposed MAI could circumvent any of the limited reservations and exceptions that have been written into other international agreement to address sovereignty concerns in areas such as public health and resource conservation.

  • While the effectiveness of exceptions and reservations in pacts like NAFTA and GATT is proving to be extremely limited, the MAI draft removes whatever space earlier agreements may have left to governments. The MAI, as currently conceived, provides exceptions from its rules only on narrow national security grounds and in the name of public order. The draft does not include public health, resource conservation or local economic development, which each have limited exceptions in NAFTA or GATT.

VII. The State of OECD Negotiations on the Proposed MAI

While the conceptualization of a global investment pact coincide with the start of the GATT Uruguay Round negotiations in the mid 1980’s, it was only in late 1996 that the existence of advanced negotiations on a specific investment proposal could be confirmed. Since 1995, MAI negotiations have been under way at the OECD’s Paris headquarters. The United States is represented by the State Department and the office of the US Trade Representative.

The MAI would require adoption by each OECD country according to domestic specifications. In the United States, it is unclear what procedure would be required for approval of a completed pact. Recently, the Clinton Administration has mentioned the possibility of adding the MAI on to its pending request for “fast track” negotiating authority from the Congress. With “fast track,” the Administration can negotiate trade agreements and have them approved by Congress without the inconvenience of amendments or thorough debate or the need for a two-thirds majority vote for passage (as otherwise mandated by the Constitution).

If an MAI is approved in OECD countries, the manner by which it would be extended to non-OECD countries is now under debate within the OECD. Two main options are under consideration:

  • The European Union and Canada want to multilateralize the MAI by incorporating it into the World Trade Organization. The United States is against putting the MAI onto the WTO agenda for two reasons: 1) The WTO does not allow investors directly to sue governments, a right which the United States would like to establish. 2) The United States fears the agreement would be “watered down” and/or implementation would be delayed by involving developing countries, who are more sensitive to limitations in governmental regulation of investment.
  • The United States wants to open the MAI to accession by other nations after its adoption by OECD countries, on a take-it-or-leave-it basis. The United States believes most developing nations will have no choice but to accept the treaty – given that the alternative could be a loss of access to desperately needed foreign capital.

Emergency Wake Up Call Needed: Lack of Public Awareness

To date, the design and negotiation of the MAI have been undertaken by the commerce and trade agencies and the state departments of a handful of OECD governments under conditions of virtual secrecy. Only a limited number of other U.S. federal government officials beyond the Commerce Department and the Office of the Trade Representative are informed about the MAI, including some in the National Economic Council.

To the extent that the MAI has been discussed by any private interests, it has been within the banking and investment industries which have direct financial interest in the terms of the proposed treaty. Indeed, these groups have had a sizeable influence on the negotiation process to date in two related manners:

  • First, these banking and financial interests are the constituents of the U.S. federal government agencies now exclusively involved in the MAI negotiations, and as such have regular contact with agency officials. Unfortunately, environmental, health or community groups have not enjoyed the same representations of their interests by “their” agencies in domestic or international discussions of global investment rules. Agencies with which such groups have the strongest affinities, such as the Environmental Protection Agency (EPA), the Food and Drug Administration (FDA), and Housing and Urban Development (HUD), have not been involved in developing the U.S. position on international investment rules, much less involved directly at the MAI negotiating table.
  • Second, there are over 500 business interests who serve as official representatives to 36 official U.S. government trade advisory committees. These 36 committees were established by statute in 1974 to provide for private sector input in a political trade-off for congressional approval of the original “fast track” trade negotiating procedure designed by President Nixon.
  • The extremely rapid pace of negotiations for an agreement with such profound implications has been possible only because of the absence of awareness and debate about the MAI on the part of many of the governmental and private interests that could be directly affected.

    Public Citizen’s Global Trade Watch has launched an international Campaign of Inquiry to find out more about the MAI and to educate the public and policy-makers. To find out more about the MAI and Campaign of Inquiry, call (202) 588-7777 to get an MAI Inquiry Packet and subscribe to the MAI listserv by sending an e-mail to listproc@essential.org reading “subscribe MAI-NOT address name.”